Hong Kong: Will The Very Efforts Designed To End The Offshore Industry Finally Legitimise It?

Since the beginning of the global financial crisis, politicians,
the media and people on the street have engaged in a series of
"blame games" to point fingers and punish those
responsible for their own economic ills. For the past few years,
one "culprit" has been firmly in the spotlight - the
offshore industry. Say the word "offshore" and you
conjure up images of Caribbean, palm-fringed islands where people
go to avoid paying tax. Is the stereotype of sunny places for shady
people fair or is there a legitimate reason why this industry
exists?

Fuelled by public sentiment and the moral debate raging about
how much tax an organisation or individual should pay,
international bodies like the OECD, the G8 and G20 have been racing
to enact a dizzying range of new initiatives such as the automatic
exchange of information, base erosion and profit shifting (BEPS)
and common reporting standards (CRS). Throw in the US Foreign
Account Tax Compliance Act (FATCA) as well and the offshore
industry is left wading through an alphabet soup of acronyms and
oversight, and one might think the future looks bleak.

But these new regulations highlight one of the great
misconceptions surrounding the offshore industry; namely that its
services are primarily used for tax-avoidance. On the contrary,
research shows that whilst historically tax planning has been a big
reason for offshore structures, asset protection and fund
management are now emerging as the main drivers.

Few outside the offshore industry really understand it, but if
you believe globalisation is a driving force behind economic
growth, job creation and delivering opportunities for the societies
that we live in, then it is worth understanding how this system is
enabled. Offshore structures and services do this by performing
crucial functions, including reducing cross border
"friction-costs" and facilitating the flow of capital. To
put it simply, it serves as the "plumbing" or
"wiring" of our modern, integrated and globalised
economies.

By way of an example, offshore jurisdictions have long served as
neutral venues for companies making cross-border investments,
motivated by the comfort drawn from robust and familiar legal
systems and professional infrastructure. Investors also benefit
from treaties preventing double taxation and for outbound
investments, greater flexibility where capital account restrictions
apply in their home country. Chinese outbound investment is set to
surpass foreign direct investment and without a fully convertible
renminbi, offshore centres like Hong Kong and the British Virgin
Islands provide the ideal "conduit" for Chinese companies
and high net worth individuals investing offshore.

To our mind the objectives of this wave of new regulation should
be to stamp out wrongdoings whilst protecting and respecting the
legitimate role the industry plays. There's no denying that
offshore structures have been abused by some and allowed dishonest
behaviour to go unnoticed, and this should be stopped. National
governments have every right to collect tax from companies and
individuals. But in the same breath, companies who operate across
borders and accept the risks that come with this shouldn't be
disincentivised by inefficient trading and investment
infrastructure.

The question of privacy remains a quandary. In Europe the debate
rages on about the use of public registers to show ultimately who
owns what. There is, in our view, a subtle but key distinction
which is being lost here – the difference between secrecy and
confidentiality. It goes to the question of intent. On one hand, an
individual or group might be trying to hide something because the
rules have been broken. On the other, everyone has a right to keep
their financial affairs out of the public domain. There are many
reasons why an individual or corporation requires information to be
confidential that are in no way nefarious

We therefore ask regulators to embrace reality not rhetoric as
further rules and regulations are being contemplated. We support
regulations that balance the need for greater transparency with a
need to support companies in their quest to go global

By enforcing greater transparency you increase accountability
which naturally encourages better behaviour and creates deeper
trust with your stakeholders. So those with nothing to hide should
not be afraid and instead embrace what this new world looks like
and the opportunities it brings. This applies to offshore centres
as well, and the smart ones are at the forefront, implementing new
regulations to improve transparency in an appropriate and measured
way and keep their jurisdiction in favour with governments and
regulators around the world

Despite the current pressures, demand for offshore structures
continues to rise as corporations and individuals look to do
business across borders, leveraging the robust legal systems and
administrative skills available in offshore centres. Research shows
that for 2014 the number of new structures incorporated in five of
the top offshore jurisdictions including British Virgin Islands
(BVI), Cayman Islands, Seychelles, Samoa and Jersey was up by more
than 23% since 2009

Against a backdrop of political pressure for more regulation and
the increasing demand for offshore structures, industry
participants have a responsibility to protect the reputation of the
industry by enforcing impeccable standards of practice and
educating stakeholders of the valuable role the industry plays in
the global financial supply chain. We are already seeing a more
co-ordinated and assertive approach towards working with
regulators, and in developing legislation through the work of
International Financial Centres Forum and the likes. We should
continue to play an active role in this process

It is perhaps ironic that the very regulations designed to stem
the industry could and should in fact legitimise it, make it
stronger, and ultimately bring it into the mainstream. With more
objective dialogue and better education – as well as an
effectively regulated and transparent system – jurisdictions
and service providers alike may finally be able to shed some of its
negative perception and be confident with the important role it
plays in enabling global economic development.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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